The United States Federal Reserve is considering to include a cryptocurrency market crash as one of the risks for conducting its supervisory stress tests.
Announced by the board of governors of the Federal Reserve System on February 28, the amendments will be added to the policy statement on the scenario design framework for stress testing and the agency will consider “the collapse of the Bitcoin market” as one of the “salient” market risks.
The recommendation was done by a commentator who placed the Bitcoin market crash on par with a war with North Korea and major losses caused by trader misconduct.
“The commenter recommended that the Board consider extraordinary shocks, such as a war with North Korea, the collapse of the Bitcoin market, or major losses caused by trader misconduct, in its scenarios,” the document stated.
The Stress Test
The Federal Reserve conducts its stress tests annually in accordance with the Dodd-Frank Wall Street Reform Act and the Board’s stress test rules.
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Since the inception of supervisory stress tests, the board has included many scenarios – domestic or international – to evaluate the impact on the market. It aims to make the tests “sufficiently dynamic” by including salient market risks in the scenario design framework.
Apart from a Bitcoin crash, oil price shocks and a severe recession in the euro area also made it to the list of the framework.
“Together, the Dodd-Frank Act supervisory stress tests are intended to provide company management and boards of directors, the public, and supervisors with forward-looking information to help gauge the potential effect of stressful conditions on the ability of these large banking organizations to absorb losses, while meeting obligations to creditors and other counterparties and continuing to lend,” the document explained.
Currently, the agency follows three test scenarios – baseline, adverse, and severely adverse – and takes into consideration factors including a firm’s balance sheet, risk-weighted assets (RWA), net income, resulting post-stress capital levels, and regulatory capital ratios.
“Where appropriate, the Board intends to continue augmenting the scenarios with risks it considers to be salient,” the document added.